LBO Terms and Definitions

Learn important terminologies used in an LBO model

Written by CFI Team

LBO Terms and Definitions

A leveraged buyout (LBO) is the acquisition of a target company that is funded using a significant amount of debt. An LBO transaction typically occurs when a private equity (PE) firm borrows as much as they can and funds the balance with equity. An LBO model is built to enable investors to properly evaluate the transaction so they can maximize the risk-adjusted internal rate of return (IRR). There are some important LBO terms and definitions which must be clearly understood in order to build a precise model.

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General Transaction Terms

Sponsor	The firm which is purchasing the company via a leveraged buyout (the buyer)
Target	The firm that is being acquired (the seller)
Normalized EBITDA	Earnings before interest taxes depreciation and amortization which excludes all non-recurring expenses or revenues
Minimum cash balance	The minimum amount of cash to show on the balance sheet, funded with a line of credit
Fully diluted shares outstanding	The number of shares outstanding after accounting for all in-the-money options, warrants, and convertible securities
Transaction close date	The date on which the transaction is expected to be officially completed
Restructuring charges	Any fees related to early debt repayments which are part of a restructuring
Equity issuance fees	Underwriting fees charged by investment banks to issue equity relating to the transaction
Debt issuance fees	Underwriting fees charged by investment banks to issue debt regarding the transaction
Other closing costs	May include due diligence fees, legal fees, accounts fees, etc. related to the deal

Financing and Leverage Terms

Offer price	The price offered per share by the sponsor
Cash consideration	The portion of the purchase price given to the target in the form of cash
Stock consideration	The portion of the purchase price given to the target in the form of shares of the acquirer’s stock
Line of credit	A loan that can be drawn based on required usage up to a maximum amount
Term loan	A loan with regularly scheduled principle repayments
Subordinated debt	Loans that rank below other types of debt and are not backed by any assets
Loan amortization	Principle repayments over the life of a loan
Sweep	The use of excess available cash to repay debt
Mandatory repayments	The minimum required principle repayments on loans
Discretionary repayments	Voluntary repayments of principle on loans with excess available cash flow
Sponsor equity	The equity contribution (investment) from the financial sponsor
Payment in kind (PIK)	Interest on a loan that accrues (instead of being paid out) and is all payable on maturity with a bullet (single) payment

Purchase Price Allocation and Deal Metrics

Identifiable assets	An asset that can be assigned a fair value and can include both tangible and intangible assets
Net book value of assets	Book value of assets minus book value of liabilities
Excess purchase price	The value of the purchase price over and above the net book value of assets (total purchase price minus net book value of assets)
Fair value adjustments	The increase or decrease in the net book value of assets to arrive at the fair market value
Goodwill	The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments)
Purchase Price Allocation	The breakdown of the total purchase price between net identifiable assets and goodwill
Intrinsic value	The estimated value of the business using discounted cash flow analysis
Sensitivity analysis	A method of testing how sensitive certain outputs in the model are to changes in certain assumptions

Additional Resource

Want to learn more about LBO? Check out our LBO Model Course, which provides a detailed lesson on how to build an LBO model step by step. Also, see our valuation resources and equities resources.